Please Critique My 2018 RRSP Investments

Have you kids made your RRSP contributions yet? Don’t sweat it, you’ve got hours left until you miss the deadline.

God, you people and your procrastinating make me sick. I got my contribution in more than a week before the deadline. There’s no need to say it; I am a better person than you are.

I used to be very patient when putting money to work, waiting for an outrageously good opportunity to pile into some obscure value stock. While I still follow such a strategy in my TFSA, I’ve started to take a different approach in my other accounts. I’m looking for high quality businesses trading at half decent prices. Yes, kids, I’ve turned into one of those guys.

In fact, as you’ll see, not only do my new investments pay a dividend, but they also have a history of consistently upping their payouts over the years. That sound you just heard? It was Dividend Growth Investor getting a bit of a chubb.

Let’s not delay any longer. Here’s what I bought with my latest RRSP contribution.

The Keg (18.2%)

There’s a lot to like about the restaurant royalty business. The cash comes directly off the top line, which insulates it from a lot of the challenges that keep down operators. The bad news about this arrangement is it stymies hardcore dividend growth since there’s virtually no operating leverage. If a restaurant can grow sales by 5% while keeping costs the same, it has a huge impact to the bottom line. A royalty trust would see profits go up by about 5%. Big whoop.

I chose The Keg over some of its competitors for one important reason. Cara Operations just announced it would be acquiring the restaurant operations. Cara, which owns brands like Swiss Chalet, Harvey’s, New York Fries, and many others, is a hell of an operator. It’s capable of taking The Keg to the next level, which will likely include further expansion into the United States.

In the meantime, I’m paid 6.3% to wait. If same store sales go up 2% a year and the company expands operations by 2% a year, I’m looking at a 10%+ return over time. I think 2% expansion is a pretty achievable goal, since the company only has 106 locations today.

Essentially, I’m buying a 6% yield that I believe has the ability to grow slightly above inflation for a long time. I expect capital appreciation to be somewhat minimal, although keep in mind that shares are up 53% in the last decade.

BCE (45.1%)

I think Canada’s so-called Big 3 telecoms are pretty much like legalized crack dealers. Have you seen how often the average person checks their phone? It’s bananas.

While I do prefer Telus over BCE (TSX:BCE)(NYSE:BCE) because the former is a pure-play telecom, there’s a lot to like about BCE too. It boasts nearly 14 million customers between its wireless, internet, and television divisions. Management continues to grow the company by making smart acquisitions, including picking up a former member of my borrow to invest portfolio, Manitoba Telecom. And thanks to a recent sell-off, shares are down nearly 10%. This has boosted the yield to a succulent 5.4%.

BCE isn’t necessarily cheap, but companies like it never really enter value territory. It did approximately $3.5 billion in free cash flow in 2017, putting shares at just over 14 times that metric. Or, if you’re a traditional P/E guy, shares trade at about 17 times earnings. Again, not really cheap, but hardly expensive.

Canadian Utilities (33.5%)

Fun fact: Canadian Utilities (TSX:CU) shares are down approximately 13% over the last five years despite:

Increasing revenue from $3.0 billion in 2012 to $4 billion in 2017

Investing nearly $9 billion in capital expenditures from 2013 to 2017

Hiking the dividend nearly 40%

Of course, it’s not all sunshine and blowjobs for Canada’s second-largest utility. 2017’s results were weighed down by a charge associated with one of the company’s big new growth projects. But normalized earnings were $2.23 per share, putting the company at just 15 times earnings.

Free cash flow was even better. CU generated $1.3 billion in cash from operations. It spent $1.2 billion on capital expenditures, but the vast majority of those expenses were for growth projects. I estimate true free cash flow (which would be cash from operations minus maintenance capex) to be approximately $1 billion. Shares today have a current market cap of $9.1 billion.

Oh, and shares yield 4.7% today. They haven’t yielded this much since Nortel was very much a thing.

Let’s wrap this up

There you have it, kids. These are the three stocks I bought with this year’s RRSP contribution. All are expected to be core holdings for a long period of time. As dividends accumulate in my account I’ll put those back to work. It’s all pretty simple.

Let me know what you think of these buys. Am I a genius? A maroon? Or something in between? The comment section awaits. I might even respond.

5 Comments

RICARDO
on February 28, 2018 at 10:24 am

Nothing wrong with BCE after the latest dip. I was waiting for it to dive below $55. Guess I will have to wait a little longer. Having said that, I do own >6K shares already. T is nice and maybe a pure play and all that but BCE has consistently paid out more than T for all the time I have been watching the both of them.
Looked up CU to get some more information on their operations in Canada but it hard to get a good overview of CU as ATCO really overlays everything. At any rate with a div of approx. 4.4% they barely rate a possible on my radar. WHY? Simply because of that famous old 4% withdrawal rate so you can remain solvent in retirement. Price wise it is a pretty good time to buy if you have the cash. If you are leveraging CU you have another three months of compounded interest before you see a div to pay down the loan. So price is reasonable but timing is slightly off. As we don’t control the market timing it is a buyer call depending on your on hand cash.
As to the KEG royalty fund, I am not a big fan of these types of stocks as they are easily swayed by management hiccups and purchaser (customer habits) trends. Try to stay away from them for now. Maybe to my own detriment but that is the way I call it. Besides, I don’t want to feel too bad when I go to another restaurant.

STI just gave me a nice 25% boost this morning. And all that for a 4 month investment (2500 shares)

Based on these selections, are we seeing a more “mature” Nelson? Dundee and Aimia are interesting picks, but perhaps Nelson has reached a stage where his investments have grown to the point there is no need to take unnecessary risks.

I’m doing something similar – there are a lot of high quality blue chip stocks on sale now with mouth watering yields that I’m swapping my higher risk holdings for.

Aimia and Dundee are two of the main reasons why I’m starting to switch my approach. Recovering from those two blowups will take a while. I really like the idea of creating another nice passive income stream, too. The intermediate goal is $10k annually from dividends.